(BQ) Part 1 book Economic has contents: What economics is about; economic activities - producing and trading; aggregate demand and aggregate supply; the self regulating economy; the federal budget and fiscal policy; money and banking; the federal reserve system, money and the economy, monetary policy,...and other contents.
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ov ssignme can help you questio e nume d a r s n r a e a a s e il r s r e e e t r im h s ap dd and Third, t each ch through oblems a the text erial in s and Pr working ibits in h in x u e o e the mat Video Question y h ft e for ss many o resourc in cla rks with e by frame o aluable v w a d o learn e n b a , r , fram nce — t ie m t and can uilds, explains a a egin you r p g d ia as you b the d sb dicate f k m e o c d ” lu g e y r f ia m o o t D so “s st tell the The be t — and ed effor worth it learn to in ll e a t w s u is s t es or at it tak e, the eff mind th id befor a s e w Keep in s a ics But, s econom ic m o n o c fe study o hes, Best Wis Arnold Roger A Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com Economics 11e Roger A Arnold California State University San Marcos Australia Brazil Canada Mexico Singapore Spain United Kingdom United States ● ● ● ● ● ● ● Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com Economics 11e © 2014, 2011 South-Western, Cengage Learning Roger A Arnold ALL RIGHTS RESERVED No part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including photocopying, recording, taping, Web distribution, information storage and retrieval systems, or in any other manner—except as may be permitted by the license terms herein Editorial Director: Erin Joyner Editor in Chief: Joe Sabatino Executive Editor: Mike Worls Editorial Assistant: Elizabeth Beiting-Lipps Sr Developmental Editor: Jennifer Thomas Sr Market Brand Manager: John Carey Brand Manager: Robin Lefevre Marketing Coordinator: Chris Walz Sr Marketing Communications Manager: Sarah Greber For product information and technology assistance, contact us at Cengage Learning Customer & Sales Support, 1-800-354-9706 For permission to use material from this text or product, submit all requests online at www.cengage.com/permissions Further permissions questions can be e-mailed to permissionrequest@cengage.com Sr Content Project Manager: Cliff Kallemeyn Media Editor: Anita Verma CL Manufacturing Buyer: Kevin Kluck Compositor: MPS Limited 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14 13 12 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com This is an electronic version of the print textbook Due to electronic rights restrictions, some third party content may be suppressed Editorial review has deemed that any suppressed content does not materially affect the overall learning experience The publisher reserves the right to remove content from this title at any time if subsequent rights restrictions require it For valuable information on pricing, previous editions, changes to current editions, and alternate formats, please visit www.cengage.com/highered to search by ISBN#, author, title, or keyword for materials in your areas of interest Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com Find more at www.downloadslide.com To Sheila, Daniel, and David Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com Cont e n t s Brief Contents An Introduction to Economics Microeconomics Part 1 Economics: The Science of Scarcity Part Microeconomic Fundamentals Chapter What Economics Is About Chapter 20 Elasticity 441 Appendix A Working with Diagrams 26 Chapter 21 C onsumer Choice: Maximizing Utility and Behavioral Economics 468 Appendix E Budget Constraint and Indifference Curve Analysis 487 Production and Costs 495 Appendix B Should You Major in Economics? 34 Chapter Production Possibilities Frontier Framework 42 Chapter Supply and Demand: Theory 57 Chapter 22 Chapter Prices: Free, Controlled, and Relative 90 Part Product Markets and Policies Chapter Supply, Demand, and Price: Applications 107 Chapter 23 P erfect Competition 526 Chapter 24 Monopoly 554 Macroeconomics Chapter 25 Monopolistic Competition, Oligopoly, and Game Theory 576 Part Macroeconomic Fundamentals Chapter 26 Government and Product Markets: Antitrust and Regulation 599 Chapter acroeconomic Measurements, Part I: Prices and M Unemployment 129 Part 10 Factor Markets and Related Issues Chapter Macroeconomic Measurements, Part II: GDP and Real GDP 144 Chapter 27 Factor Markets: With Emphasis on the Labor Market 618 Chapter 28 Wages, Union, and Labor 642 Chapter 29 The Distribution of Income and Poverty 657 Chapter 30 Interest, Rent, and Profit 674 Part 3 Macroeconomic Stability, Instability, and Fiscal Policy Chapter Aggregate Demand and Aggregate Supply 165 Chapter Classical Macroeconomics and the Self-Regulating Economy 195 Chapter 10 Keynesian Macroeconomics and Economic Instability: A Critique of the Self-Regulating Economy 217 Chapter 31 Market Failure: Externalities, Public Goods, and Asymmetric Information 694 Chapter 11 Fiscal Policy and the Federal Budget 246 Chapter 32 Public Choice and Special-Interest-Group Politics 721 Part 4 Money, The Economy, and Monetary Policy Chapter 12 Money, Banking, and the Financial System 269 Chapter 13 The Federal Reserve System 287 Part 11 Market Failure, Public Choice, and Special-Interest-Group Politics Part 12 Economics Theory-Building and Everyday Life Chapter 33 Appendix C The Market for Reserves (or the Federal Funds Market) 304 Chapter 14 Money and the Economy 308 Chapter 15 Monetary Policy 335 Appendix D Bond Prices and the Interest Rate 357 Part 5 Expectations and Growth Chapter 16 Expectations Theory and the Economy 360 Chapter 17 Economic Growth: Resources, Technology, Ideas, and Institutions 384 Part 6 The Financial Crisis of 2007–2009 Building Theories to Explain Everyday Life: From Observations to Questions to Theories to Predictions 741 The Global Economy Part 13 International Economics and Globalization Chapter 34 International Trade 763 Chapter 35 International Finance 781 Chapter 36 Globalization and International Impacts on the Economy 799 Web Chapters Chapter 18 The Financial Crisis of 2007–2009 402 Chapter 37 The Economic Case For and Against Government: Five Topics Considered 830 Part Government and the Economy Chapter 38 Stocks, Bonds, Futures, and Options 851 Chapter 19 Debates in Macroeconomics Over the Role and Effects of Government 425 Chapter 39 Agriculture: Problems, Policies, and Unintended Effects 870 Self-Test Appendix 831 Glossary 858 Index 869 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com CONTEN ts Contents An Introduction to Economics Part 1 Economics: The Science of Scarcity CHAPTER 1: What Economics is About Your Life, 2014–2024 Low Admission Rates at Yale What Does Scarcity Have to Do with the Number of Friends You Have? A Definition of Economics Goods and Bads 2 Resources 2 Scarcity and a Definition of Economics The Counterintuitive in Economics Key Concepts in Economics Opportunity Cost 5 Opportunity Cost and Behavior 7 Benefits and Costs 7 Decisions Made at the Margin 8 Efficiency 10 Economics Is About Incentives 12 Unintended Effects 12 Exchange 14 Why Did the British Soldiers Wear Red Uniforms? 10 The Market and Government 14 When Are People the Most Likely to “Lose” Library Books? The Case of Alchian and Allen’s University Economics 19 Economic Categories 20 Ceteris Paribus and Theory 16 Ceteris Paribus Thinking 16 What Is a Theory? 17 Positive and Normative Economics 20 Microeconomics and Macroeconomics 20 Chapter Summary 22 Key Terms and Concepts 23 Video Questions and Problems 24 “I Don’t Believe That Every Time a Person Does Something, He Compares the Marginal Benefits and Costs” 21 Questions and Problems 24 Working with Numbers and Graphs 25 Appendix A: Working with Diagrams 26 Slope of a Line 27 Slope of a Line Is Constant 28 Slope of a Curve 28 The 45-Degree Line 28 Pie Charts 30 Bar Graphs 30 Line Graphs 31 Appendix B: Should You Major in Economics? 34 Five Myths About Economics and Being an Economics Major 35 What Awaits You As an Economics Major? 38 What Do Economists Do? 39 Places to Find More Information 41 Concluding Remarks 41 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it v Find more at www.downloadslide.com vi Cont e n t s chapter 2: Production Possibilities Frontier Framework 42 The Production Possibilities Frontier 42 The PPF and Your Grades 49 Political Debates Explained in Terms of the PPF 52 he Straight-Line PPF: Constant Opportunity Costs 42 The Bowed-Outward (ConcaveT Downward) PPF: Increasing Opportunity Costs 43 Law of Increasing Opportunity Costs 44 Economic Concepts in a PPF Framework 45 Specialization and Trade Can Move Us Beyond Our PPF 50 A Simple Two-Person PPF Model 50 On or Beyond the PPF? 53 Chapter Summary 55 Key Terms and Concepts 55 “What Purpose Does the PPF Serve?” 54 Video Questions and Problems 55 Questions and Problems 55 Working with Numbers and Graphs 56 chapter 3: Supply and Demand: Theory 57 What Is Demand? 57 Disney World Ticket Prices 60 iPods and the Law of Demand 64 The Dowry and Marriage Market Disequilibrium 78 When Might You Buy More Than You Want to Buy? 81 “Sorry, but This Flight Has Been Overbooked” 83 “I Thought Prices Equaled Costs Plus 10 Percent” 86 The Law of Demand 58 Four Ways to Represent the Law of Demand 58 Why Does Quantity Demanded Go Down as Price Goes Up? 59 Individual Demand Curve and Market Demand Curve 60 A Change in Quantity Demanded Versus a Change in Demand 61 What Factors Cause the Demand Curve to Shift? 63 Movement Factors and Shift Factors 66 Supply 68 The Law of Supply 68 Why Most Supply Curves Are Upward Sloping 68 Changes in Supply Mean Shifts in Supply Curves 69 What Factors Cause the Supply Curve to Shift? 70 A Change in Supply versus a Change in Quantity Supplied 72 The Market: Putting Supply and Demand Together 73 S upply and Demand at Work at an Auction 73 Moving to Equilibrium: What Happens to Price When There Is a Surplus or a Shortage? 74 Speed of Moving to Equilibrium 76 Moving to Equilibrium: Maximum and Minimum Prices 76 The Connection Between Equilibrium and Predictions 76 Equilibrium in Terms of Consumers’ and Producers’ Surplus 77 What Can Change Equilibrium Price and Quantity? 82 Epilogue: Who Feeds Cleveland? 84 Chapter Summary 87 Key Terms and Concepts 87 Video Questions and Problems 88 Questions and Problems 88 Working with Numbers and Graphs 89 chapter 4: Prices: Free, Controlled, and Relative 90 A Price Ceiling in the Kidney Market 95 Price 90 1973 and 1979 96 Price Controls 92 Will a Soda Tax Reduce Obesity? 101 Relative Prices and Having Children 103 Price as a Rationing Device 90 Price as a Transmitter of Information 91 Price Ceiling 92 Price Floor: Definition and Effects 97 Two Prices: Absolute and Relative 100 Absolute (Money) Price and Relative Price 100 Taxes on Specific Goods and Relative Price Changes 102 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com 426 PART Government and the Economy are headed up, and that the prospects for economic growth look bleak for the near future Even though all three economists have the same diagnosis, they will not necessarily recommend the same government policies The first economist might argue that government should nothing (no government medicine), the second might argue that medicine X is needed, and the third might recommend medicine Z The first economist has government doing nothing, the second economist has the government doing X, and the third economist has government doing Z Ask most students of macroeconomics (especially those who are taking their first course in macroeconomics) what they would like to take away from the course, and they say something like this: “We would like to get explanations for the various macroeconomic phenomena (recessions, inflation, high unemployment) and what is the right approach to deal with a particular macroeconomic phenomenon.” Their thinking is like a doctor’s: “What is wrong with the patient, and what is the best medicine for the patient to take to get well?” In economic terms, the questions would be, “What is wrong with the economy, and what is the best policy to enact to get the economy well?” But the answers in economics are not so clear-cut President Harry S Truman once said, “Give me a one-handed economist All my economists say, ‘On the one hand, and then on the other hand.’” No doubt students of macroeconomics experience some of Truman’s frustration with economists Because this is probably your first college course in macroeconomics, you would probably be content with a “one-handed” answer But you wouldn’t be getting an accurate picture of economic theory and its effects on policy To present an accurate picture, you need to hear some of the debates in macroeconomics, especially as they relate to the role of government in the economy Some of what we will discuss here has been discussed in earlier chapters, sometimes with a different emphasis The outline in this chapter is fairly straightforward We identify a number of macroeconomic topics Next, we explain how government comes up in the discussions of various economists with respect to that topic 19-2 Tax Cuts, Tax Revenue, and Budget Deficits Suppose the federal government is running a budget deficit; government spending is greater than tax revenues To reduce the size of the deficit, some economists propose income tax cuts Other economists argue that income tax cuts will not lead to a smaller deficit The source of the disagreement between the two sets of economists is the issue of whether tax cuts will or will not raise tax revenue One group of economists argues this way: (1) If income tax rates are cut, individuals will choose to work and produce more (2) As a result, they will generate more income and the tax base will rise (3) If the tax base rises by more than tax rates are cut, then tax revenue will rise (4) More tax revenue will end up reducing the size of the budget deficit Another group of economists challenges assumption They argue that that the tax base is not likely to rise by more than tax rates are cut, so result will be less tax revenue and therefore a bigger budget deficit The discussion goes back to this equation, first identified in Chapter 11: Tax revenues Tax base (average) Tax rate Almost all economists will agree that if the tax rate is cut, the tax base will rise, but not all economists agree as to how much the tax base will rise In other words, if the tax rate is cut 10 percent, will the tax base rise by more than, less than, or as much as the cut in the tax rate? What separates economists here is an empirical issue Specifically, economists sometimes disagree on what is likely to happen given a certain action In other words, if tax rates are cut, then what? Do tax revenues rise, decline, or remain constant? Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com C hapter Debates in Macroeconomics over the Role and Effects of Government 427 To recap in terms of these differing economic perspectives: ●● ●● Economist A Tax cuts will raise tax revenue, and increased tax revenue will decrease the size of the budget deficit Economist B Tax cuts will lower tax revenue, and decreased tax revenue will increase the size of the budget deficit 19-3 The Economy: Self-Regulating or Not? One major debate in macroeconomics focuses on whether the economy is self-regulating Specifically, if an economy is in a recessionary gap, can it move itself into long-run equilibrium? To a degree, the answer depends on whether wages are flexible or inflexible downward If wages are flexible, then an economy can remove itself from a recessionary gap Hence, government need not get involved in managing the economy But if wages are inflexible downward, then an economy cannot remove itself from a recessionary gap; an economy can get stuck in a recessionary gap The economy can get unstuck only by means of economic policy enacted by either the Congress or the president (in terms of fiscal policy) or by the Fed (in terms of monetary policy) To recap in terms of these differing economic perspectives: ●● ●● Economist A Wages are flexible, so if the economy is in a recessionary gap, it will soon remove itself from the gap Government doesn’t have to anything Economist B Wages are inflexible downward, so if the economy is in a recessionary gap, it may be stuck there The best course of action is for the federal government to implement expansionary fiscal policy or for the Fed to implement expansionary monetary policy to remove the economy from the recessionary gap 19-4 More Government Spending or a Cut in Taxes: Which Gives a Bigger Bang for the Buck? The economy is in a recessionary gap, and economists call for a demand-side expansionary fiscal policy measure As we know, expansionary fiscal policy consists of (1) an increase in government purchases or (2) a cut in taxes or (3) both Not all economists are likely to agree on the best way to proceed One economist will argue that a rise in government purchases will give the economy the “biggest bang for the buck.” A $1 rise in government purchases will (by changing aggregate demand) raise Real GDP by more than a $1 cut in taxes In other words, the government spending multiplier [the number that, when multiplied by the change in government spending, gives us the change in total spending (and, if prices are constant, the change in Real GDP)] is larger than the tax multiplier [the number that, when multiplied by the change in taxes, gives us the change in total spending (and if prices are constant, the change in Real GDP] Another economist argues just the opposite: The tax multiplier is larger than the government spending multiplier, so a $1 cut in taxes will raise Real GDP by more than a $1 rise in government purchases Suppose that the government spending multiplier is 1.4 and the tax multiplier is This means that a $1 rise in government spending will increase Real GDP by $1.40, and a $1 tax cut will increase Real GDP by $3 Now the debate and disagreement among economists can focus on the value of the two multipliers In the standard textbook Keynesian analysis, there is reason to believe that the government spending multiplier is larger than the tax multiplier Here is the reasoning: When Government Spending Multiplier The number that, when multiplied by the change in government spending, gives us the change in total spending (and, if prices are constant, the change in Real GDP) Tax Multiplier The number that, when multiplied by the change in taxes, gives us the change in total spending (and if prices are constant, the change in Real GDP) Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com 428 PART Government and the Economy government spends $1, the entire $1 enters the spending stream However, when government cuts taxes by $1, individuals spend some of the dollar they now get to keep and save some of it In other words, they might spend 60 cents of the dollar and save 40 cents What separates economists, though, is that not all economists hold to the standard textbook analysis Some economists argue that the standard textbook analysis does not take into account all the ways that tax cuts can be stimulative To recap in terms of these differing economic perspectives: ●● ●● Economist A The economy needs expansionary fiscal policy to remove it from a recessionary gap Government should either raise its spending or cut taxes I believe the government spending multiplier is larger than the tax multiplier; so I suggest government increase its spending Economist B The economy needs expansionary fiscal policy to remove it from a recessionary gap Government should either raise its spending or cut taxes I believe the tax multiplier is larger than the government spending multiplier, so I suggest government cut taxes 19-5 More Government Spending or a Cut in Taxes: The Size and Scope of Government The size of government relates to the resources over which government has command Suppose the economy has 100 units of labor, with 30 of the units allocated through government and 70 units through the private sector Government grows in size, relative to the private sector, if it begins to allocate more than 30 units of labor and the private sector beings to allocate less than 70 units of labor The scope of government relates to what government does Suppose government can provide for the national defense, build roads and bridges, provide schools, and institute and operate Social Security The scope of government relates to how many things government actually does If it only provides for the national defense and builds roads and bridges, then its scope is more limited than if it provides for the national defense, builds roads and bridges, and implements and operates Social Security Both a rise in government purchases and a cut in taxes are expansionary fiscal policy measures, but both don’t have the same impact on the size and scope of government To illustrate, suppose economist A calls specifically for more government spending to get the economy out of a recessionary gap The argument is standard fare: A rise in government purchases increases aggregate demand and removes the economy from the recessionary gap But couldn’t a tax cut, instead of greater government spending, the same thing? For instance, an income tax cut will raise after-tax (or disposable) income With greater after-tax income, individuals will buy more goods and services, thus increasing consumption in the economy And a rise in consumption will raise aggregate demand, perhaps by enough to move the economy out of a recessionary gap The decision between government spending and tax cuts depends partly on the effect that each has on the size and scope of government Economist A favors bigger government (government making more decisions); when it comes to advocating increased government purchases or tax cuts, he argues for increased government purchases He sees increased government purchases as increasing the size and possibly the scope of government Economist B favors smaller government (government making fewer decisions); when it comes to advocating increased government purchases or tax cuts, she argues for tax cuts She sees cutting taxes as decreasing the size and possibly the scope of government Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com C hapter Debates in Macroeconomics over the Role and Effects of Government To recap in terms of these differing economic perspectives: ●● ●● Economist A Expansionary fiscal policy is needed to raise aggregate demand and remove the economy from a recessionary gap The choice of fiscal policy measures is between more government spending or a cut in taxes Since I am in favor of bigger government, I choose more government spending Economist B Expansionary fiscal policy is needed to raise aggregate demand and remove the economy from a recessionary gap The choice of fiscal policy measures is between more government spending or a cut in taxes Since I am in favor of smaller government, I choose a cut in taxes 19-6 The Degree of Crowding Out Suppose ten out of ten economists agree that the economy is in a recessionary gap Seven of them argue that an expansionary fiscal policy measure in the form of greater government spending will remove the economy from the recessionary gap Their argument is that if government purchases increase, aggregate demand in the economy will rise, and the economy will move out of the recessionary gap Also, any increase in government purchases will not crowd out any private sector spending (i.e., spending by households and businesses) The other three economists see things a little differently They argue that a lot of crowding out is likely, thus weakening the impact of the expansionary fiscal policy measure Their argument is that if government purchases increase, aggregate demand probably will not rise enough to remove the economy from the recessionary gap because for every dollar the government spends, it has to borrow a dollar In short, to get an additional dollar to spend, government must first borrow it If the borrowed dollars come from the private sector, then the private sector will have fewer dollars to spend on various goods and services; so more government spending means less private sector spending The rise in aggregate demand due to more government spending is largely offset by a reduction in aggregate demand because of less private sector spending In the end, aggregate demand will change little, if at all, so that government will have been ineffective in its attempt to remove the economy from the recessionary gap In terms of jobs, jobs created or saved because of increased government spending are offset by jobs destroyed by a decline in private sector spending To recap in terms of these differing economic perspectives: ●● ●● Economist A A rise in government purchases will increase aggregate demand and remove the economy from the recessionary gap because little or no crowding out will occur A rise in government purchases will end up increasing the number of jobs in the economy Economist B A rise in government purchases will not increase aggregate demand and remove the economy from the recessionary gap because of complete (or nearly complete) crowding out 19-7 The Politics of Government Spending Consider two settings In setting 1, fiscal policy emerges in a political vacuum In setting 2, it undergoes a political process The fiscal policy created in a political vacuum is probably not going to be the same as the fiscal policy that arises from a political process For example, government spends $100 on good X in setting Will it spend $100 on good X in setting 2? Probably not In setting 2, it might spend more or less on good X In fact, in setting 2, it might not spend any money on good X Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 429 Find more at www.downloadslide.com 430 PART Government and the Economy As an example, in 2008–2009, the U.S economy was on a downward slide: Real GDP was declining, the unemployment rate was rising, and some companies were cutting employment, while others were closing down Many economists argued that an expansionary policy measure was needed to strengthen the economy (specifically, to turn the decline in Real GDP around, to reduce the unemployment rate, etc.) Some economists called for more government spending However, the government-needs-to-spend-more group contained factions Some argued that the important objective for the economy is that government spends more; of lesser importance was what government spent the money on In other words, whether government spent money having people dig ditches and then fill them up or building bridges and roads, a dollar spent is a dollar spent as far as the economy goes Other economists disagreed, arguing that how the money was spent would make a difference in the effect on the economy Money spent on having people dig ditches and then fill them up is not as beneficial to the economy as spending money to build bridges and roads More importantly, these same economists argued that much of the additional money spent by government would end up motivated by politics instead of economics In other words, members of Congress might find a large spending bill just the cover they needed to reward their political allies Of course, from an economic perspective, if a dollar spent here is the same as a dollar spent there, rewarding one’s political allies does not come with an economywide cost But if spending a dollar in some ways is more productive for the economy than spending it in other ways, then how the dollar is spent matters a lot To recap in terms of these differing economic perspectives: ●● ●● Economist A An expansionary fiscal policy measure is needed to increase Real GDP, lower the unemployment rate, and so on I propose $100 billion more in government spending It doesn’t really matter what the $100 billion is spent on; the important thing is that the money is spent Economist B An expansionary fiscal policy measure is needed to increase Real GDP, lower the unemployment rate, and so on Ideally, the economy needs $100 billion more in government spending But how the money is spent will be determined by Congress, and Congress is likely to be motivated by political interests Furthermore, not all spending is the same Some spending is better for the economy than other spending I think much of the spending that we will get from Congress will be motivated by politics instead of by economics, and sometimes the spending motivated by politics will be of little help in turning the economy around In the end, I have my doubts as to how effective an increase in government spending will be in aiding the economy 19-8 Monetary Policy: Rules Versus Discretion With regard to the creation of monetary policy, some economists argue in favor of a rulebased system, whether it is the Taylor rule or setting the growth of the money supply equal to some fixed percentage rate (such as percent) Other economists argue in favor of discretion for the Fed, saying that the Fed needs to have the flexibility to create the best monetary policy possible given the circumstances The debate between these economists centers around two major points The first has to with the effects of different types of monetary policy: rule-based versus discretionary Those who advocate rule-based monetary policy often say that it is more likely than discretionary monetary policy to produce nearly stable prices, low unemployment, low and stable interest rates, and the right overall conditions for sustained economic growth Economists who advocate discretionary monetary policy argue that it is more likely to achieve the Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com In February 2009, the U.S Congress passed a $787 billion stimulus bill (an expansionary fiscal policy measure) At the time the bill passed, various economists had different things to say about it Some argued that it was the right thing to to stimulate the economy Some argued that it wouldn’t stimulate the economy Some argued that the bill was filled with political pork, which wasn’t always consistent with the kind of spending and tax cuts needed to jump-start the economy On February 17, 2009, The Wall Street Journal published the details of the stimulus bill in terms of (1) classification—such as spending or tax provisions, (2) keyword, (3) description, and (4) cost The full details of the stimulus can be found at http://online.wsj.com/public/resources/documents/ STIMULUS_FINAL_0217.html Here we show you only a small sample of a few provisions in the stimulus bill Classification © Travel Bug/Shutterstock.com What Does a Stimulus Bill Look Like? Keyword Description Cost ($ millions) Spending Farming Loans to rural homeowners Aid Food Adult and child day care meals and snacks Spending Commerce Extra money for Census Spending Science NASA climate research 400 Spending Energy Training of electric grid workers 100 Spending Government Oversight of Small Business Administration spending 10 Spending Arts Grants to fund art projects in nonprofit sector 50 Aid Education Increase in Pell grants Spending Military Army child development centers 80 Spending State Passport and training funding for State Department 90 Spending Transportation Grants for highway improvements 29,000 Aid Aid to States Aid to states to balance education budgets prevent cutbacks and modernize schools 40,600 Tax provisions Business tax cuts Tax cuts for low-income housing investors Aid Other tax cuts U.S lumber, steel and other companies can keep money they were given from Canadian and Mexican import duties Aid Individual aid Extension of jobless benefits up to 33 weeks 29,960 Tax provision Individual tax cut Tax credit up to $2,500 for tuition and college expenses 13,907 Aid Health care Federal aid to states for Medicare spending 90,044 Spending Transportation Grants to Amtrak 1,300 Spending Housing Repairs and modernization of public housing projects 1,000 2,002 Tax provisions Energy tax cuts Tax credit for plug-in electric vehicle conversion Spending Outdoors Priority road, bridge, and trail repairs $ 200 100 1,000 17,114 143 90 180 431 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com PART Government and the Economy desired economic results because the monetary authority has the flexibility to shape the best monetary policy to the existing circumstances The second major point is that rules-based monetary policy advocates often assert that discretionary monetary policy, all too often, is motivated by political instead of economic interests A rules-based monetary policy removes monetary policy from politics, they argue, in the end, making for better monetary policy The money supply is too important an economic variable, with too many far-reaching effects, to have politicians pushing it one way or another to serve their short-run, the next-election-is-around-the-corner interests To recap in terms of these differing economic perspectives: ●● ●● Economist A A monetary rule is preferred to a discretionary Fed The former is more likely to bring about stable prices, low unemployment, and so on In addition, a monetary rule removes monetary policy from politics Economist B A discretionary Fed is preferred to a monetary rule The Fed needs the flexibility to tailor monetary policy to the existing circumstances 19-9 Bailouts Not all economists are agreed as to whether government should bail out companies in financial problems Suppose a large company employs thousands of workers, pays millions of dollars in taxes to the state in which it is located, buys hundreds of parts from its suppliers in assembling its product, and has thousands of bondholders and stockholders Then the company finds itself in dire financial straits—so dire that the company finds it difficult to repay its debt or to obtain loans Without some financial assistance, the company will probably go out of business If it does, its home state will lose millions of dollars in tax revenue, employees will lose their jobs, its suppliers lose sales revenues (perhaps causing them to go out of business), fire workers, and so on, and thousands of investors will see their personal wealth diminished Does the government have a role to play in bailing out this company? One way to answer that question is to ask another: Who loses if the company goes out of business? Certainly the owners of the business lose, but then there might be others, such as the employees who lose their jobs, the suppliers of the company who lose business, the state that loses the tax revenue, and the investors who lose personal wealth If the total dollar amount of loss is $50 billion and the federal government bailout of the company comes to $30 billion in taxpayer funds, then, for $30 billion, a $50 billion loss could be averted Some would argue that bailing out the company (and, one step removed, those who would be adversely affected by the company’s failure) would be economically advantageous In fact, this was the argument when the federal government bailed out several financial institutions and both General Motors and Chrysler during the financial and economic crisis in the mid-to-late 2000s A little bailing out here and there may be better than letting large businesses fail and in the process drag down others with them However, another viewpoint goes like this: (1) The people ultimately doing the bailing out—the taxpayers—incur the cost of the bailout, while others receive the benefits (such as the company owners, the employees, and others) Why should the taxpayers pay the costs while others receive the benefits, especially when many of the taxpayers have less income than the persons who are bailed out? (2) If firms know they will be bailed out, they will take more risks than if they know they won’t be The possibility of a bailout creates an environment in which more and more firms will need bailouts The owners and managers of firms © AP Photo/Mark Lennihan 432 Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com C hapter Debates in Macroeconomics over the Role and Effects of Government will want to take ever more risk because if high returns follow, then they are the winners, but if failure comes, the federal government, with taxpayer funds in hand, will bail them out “Heads, we win; tails, others lose.” That will bring on many more business failures than “heads, we win; tails, we lose.” To recap in terms of these differing economic perspectives: ●● ●● Economist A In a perfect world, bailing out companies is not a good idea But company X is a large company, and, if it goes out of business, that will adversely affect hundreds of thousands of persons Bailing out the company is better than letting it fail; we lose more by letting the company fail than by saving it Some companies are simply too big to be allowed to fail Their failure is like an earthquake, adversely affecting all the people around them To save the innocent, you sometimes have to save the not-so-innocent Economist B Who is “we” when you say, “We lose more by letting the company fail than by saving it?” Some persons gain by having the company bailed out, and others lose Furthermore, if we continue to tell companies that the federal government will be there if they fail, we simply create an environment in which we privatize gains (the companies keep the gains if there are any) and socialize the costs (spread the costs among millions of taxpayers if the companies end up in financial problems) In the end, this will lead to more companies that “need” to be bailed out 19-10 Demand-Side and Supply-Side Views of the Economy and Government Tools to Change Real GDP Much of our discussion of macroeconomics has been in terms of aggregate demand and aggregate supply Whereas the AD curve was always represented as downward sloping, the AS curve was shown in different ways according to the macroeconomic model For example, in the simple quantity theory of money, the AS curve is vertical In many other models we represented, it is upward sloping Exhibit 1(a)–(b) shows two aggregate supply curves Each of these two aggregate supply curves has its own meaning in terms of changes in aggregate demand If the aggregate supply curve is vertical and aggregate demand rises— the AD curve shifts rightward—the price level will rise, but Real GDP will not change See Exhibit 1(c) But if the aggregate supply curve is upward sloping, a rise in aggregate demand will raise both the price level and Real GDP See Exhibit 1(d) Depending on your view of whether the real aggregate supply curve is vertical or upward sloping, how would you respond to this question? Assuming that the objective is to raise Real GDP, would it be preferable for government to try to increase aggregate demand or aggregate supply? The economists who view the AS curve as vertical will say that government cannot anything to raise Real GDP from the demand side of the economy, because changes in AD don’t change Real GDP if the AS curve is vertical Forget an increase in government purchases, a demand-side tax cut, or expansionary monetary policy These actions may change AD, but a change in AD—in the face of a vertical AS curve—will lead to a change only in prices, not in Real GDP The only way for Real GDP to rise is for the AS curve to shift rightward Of course, economists who view the AS curve as upward sloping will disagree For them, both a change in AD and a change in AS will affect Real GDP Changes in Real GDP may be realized by changes that originate on either the demand side or the supply side of the economy If the aggregate supply curve is upward sloping, an increase in aggregate Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it 433 Find more at www.downloadslide.com 434 PART Government and the Economy EXHIBIT The Aggregate Supply Curve and What Government Can and Cannot Do Two aggregate supply curves: (a) The curve is vertical (b) It is upward sloping In this text, we have often spoken of each of these two differently shaped curves (c) Changes in aggregate demand will not change Real GDP if the aggregate supply curve is vertical (d) Changes in aggregate demand will change Real GDP if the aggregate supply curve is upward sloping For the vertical-AS economist, changes in Real GDP originate only on the supply-side economy; so government policy that aims to affect the demand side of the economy will change only prices, not Real GDP For the upward-sloping-AS economist, changes in Real GDP can originate on either the demand side or the supply side of the economy; so government policy that aims to affect either side of the economy will not only change prices, but Real GDP too For the vertical-AS economist, government has fewer tools (demand-side fiscal policy and monetary policy won’t work) to change Real GDP than the upward-sloping AS economist would say government has AS Price Level (P) Price Level (P ) SRAS 0 Real GDP(Q) Real GDP(Q) (a) (b) AS P1 P2 P1 AD2 AD2 AD1 Q1 (c) Real GDP(Q) AD1 Q1 Q2 Real GDP(Q) (d) demand will lead to a rise in Real GDP (at least in the short run), as will an increase in aggregate supply Viewing things from the demand side of the economy, these economists would argue that a rise in government purchases, a demand-side tax cut, and monetary policy will all be effective at changing Real GDP Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it © Cengage Learning 2014 P2 Price Level (P) Price Level (P) SRAS1 Find more at www.downloadslide.com C hapter Debates in Macroeconomics over the Role and Effects of Government 435 Comparing our two camps of economists, the vertical-AS group sees fewer government tools (demand-side fiscal policy and monetary policy won’t work) capable of raising Real GDP than the upward-sloping AS economists To recap in terms of these differing economic perspectives: ●● ●● Economist A The aggregate supply curve is vertical Therefore, government actions designed to change aggregate demand in the economy will not lead to changes in Real GDP Changes in Real GDP come from the supply side of the economy, not the demand side Government has fewer tools (demand-side fiscal policy and monetary policy won’t work) capable of raising Real GDP than the upward-sloping AS economist believes Economist B The aggregate supply curve is upward sloping (in the short run) Government actions designed to change aggregate demand in the economy will lead to changes in Real GDP (at least in the short run) Changes in Real GDP (in the short run) can come from either the demand side or the supply side of the economy Government has more tools (demand-side fiscal policy and monetary policy work) capable of raising Real GDP than the vertical-AS economist believes Self-Test (Answers to Self-Test questions are in Answers to Self-Test Questions at the back of the book.) Economist A believes that a reduction in tax rates will lead to increased tax revenue, and economist B believes the opposite What does each believe with respect to the relationship between the percentage change in tax rates and the percentage change in the tax base? Not all economists agree on what constitutes the optimal size and scope of government Therefore, they won’t all agree as to the preferred fiscal policy measure to stimulate the economy— increased government purchases or tax cuts Do you agree or disagree? Explain your answer In the standard textbook Keynesian analysis, there is reason to believe that the government spending multiplier is larger than the tax multiplier Why? Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com “What Kinds of Debates Do Macroeconomists Have?” STUDENT: I’d like some way to categorize the kinds of debates that macroeconomists have Can you help here? INSTRUCTOR: Four words: theory, policy, empirics, and government Here is what we mean by each Economists sometimes debate theory For example, think of the economist who builds a theory that assumes wages are inflexible downward and another economist who builds a theory that assumes flexible wages Economists often debate the kind of policy that will best solve the economic problem at hand To illustrate, economist A might argue that a supply-side tax cut is better able to solve the problem of lagging economic growth than a demand-side rise in government spending Economist B might argue the opposite, especially if the increased government spending is directed toward research and development Economists often debate empirical results To illustrate, economist A could say that during period X, the data show that expansionary fiscal policy did raise aggregate demand and did increase Real GDP Economist B might argue that during period X, many things occurred, only one of which was the implementation of expansionary fiscal policy Monetary policy was also expansionary during the period, and it, more than expansionary fiscal policy, is the reason why aggregate demand increased and Real GDP increased Economists also debate the role government should play in the economy Often how they argue here is related to their views of how the economy works For example, as we have stated in this chapter and others, consider an economist who believes that the evidence is consistent with a self-regulating economy—one that regulates itself quickly He is less likely to advocate government macroeconomic interventions in the economy than an economist who believes that the evidence is consistent with either an unstable economy or with an economy that is unacceptably slow in self-regulating STUDENT: One other question about debates in macroeconomics: I’ve heard about freshwater and saltwater economists What these two terms mean, and what is the essential difference between them when it comes to government’s role in the economy? INSTRUCTOR: Sometimes these macroeconomic differences between economists find a home in two words: freshwater and saltwater, specifically, freshwater economists and saltwater economists At universities such as Chicago, Minneapolis, and Rochester, which are all located near the Great Lakes, so-called freshwater economists can be found At universities such as Harvard, MIT, and UC Berkeley—all near oceans— saltwater economists can be found Of course, the proximity to freshwater or saltwater isn’t what fundamentally separates economists It is differences in theory, policy, and the role of government With respect to the latter, freshwater economists see a smaller role for government than saltwater economists POINTS TO REMEMBER The debates in macroeconomics often focus on theory, policy, empirics, and government It is not uncommon for an economist’s view of how the economy works to influence his or her view on the role government should play in the economy Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com C hapter Debates in Macroeconomics over the Role and Effects of Government 437 Chapter Summary In this chapter, the summary is presented in terms of the opposing views of economists on macroeconomic issues Tax Cuts, Tax Revenue, and Budget Deficits ●● ●● Economist A Tax cuts will raise tax revenue, and increased tax revenue will decrease the size of the budget deficit Economist B Tax cuts will lower tax revenue, and decreased tax revenue will increase the size of the budget deficit ●● The Economy: Self-Regulating or Not? ●● ●● Economist A Wages are flexible, so if the economy is in a recessionary gap, it will soon remove itself from the gap Government need not anything Economist B Wages are inflexible downward, so if the economy is in a recessionary gap, it may be stuck there The best course of action is for the federal government to implement expansionary fiscal policy or for the Fed to implement expansionary monetary policy to remove the economy from the recessionary gap More Government Spending or a Cut in Taxes: Which Gives a Bigger Bang for the Buck? ●● ●● Economist A The economy needs expansionary fiscal policy to remove it from a recessionary gap Government should either raise its spending or cut taxes I believe the government spending multiplier is larger than the tax multiplier; so I suggest government increase its spending Economist B The economy needs expansionary fiscal policy to remove it from a recessionary gap Government should either raise its spending or cut taxes I believe the tax multiplier is larger than the government spending multiplier; so I suggest government cut taxes More Government Spending or a Cut in Taxes: The Size and Scope of Government ●● Economist A Expansionary fiscal policy is needed to raise aggregate demand and to remove the economy from a recessionary gap The choice of fiscal policy measures is between either more government spending or a cut in taxes Since I am in favor of bigger government, I choose more government spending Economist B Expansionary fiscal policy is needed to raise aggregate demand and to remove the economy from a recessionary gap The choice of fiscal policy measures is between more government spending or a cut in taxes Since I am in favor of smaller government, I choose a cut in taxes The Degree of Crowding Out ●● ●● Economist A A rise in government purchases will increase aggregate demand and remove the economy from the recessionary gap because little or no crowding out will occur A rise in government purchases will increase the number of jobs in the economy Economist B A rise in government purchases will not increase aggregate demand and remove the economy from the recessionary gap because of complete (or nearly complete) crowding out The Politics of Government Spending ●● ●● Economist A An expansionary fiscal policy measure is needed to increase Real GDP, lower the unemployment rate, and so on I propose $100 billion more in government spending What the $100 billion is spent on does not matter; the important thing is that the money is spent Economist B An expansionary fiscal policy measure is needed to increase Real GDP, lower the unemployment rate, and so on Ideally, the economy needs $100 billion more in government spending But how the money will be spent will be determined by Congress, which is likely to be motivated by political interests when it determines how the money is spent Furthermore, not all spending is the same Some spending is better for the economy than other spending I think much of the spending will be motivated by politics instead of economics, and sometimes the spending motivated by politics will be of little help in turning the economy around In the end, I have my doubts as to how effective an increase in government spending will be in aiding the economy Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com 438 PART Government and the Economy Monetary Policy: Rules or Discretion? ●● ●● Economist A A monetary rule is preferred to a discretionary Fed The former is more likely to bring about stable prices, low unemployment and so on In addition, a monetary rule removes monetary policy from politics Economist B A discretionary Fed is preferred to a monetary rule The Fed needs the flexibility to tailor monetary policy to existing circumstances ●● Demand-Side Versus Supply-Side View of the Economy and Government Tools to Change Real GDP ●● Bailouts ●● an environment in which we privatize gains (the companies keep the gains if there are any) and socialize the costs (spread the costs among millions of taxpayers if the companies end up in financial problems) In the end, this will lead to more companies that “need” to be bailed out Economist A Ideally, bailing out companies is not a good idea But company X is a large company that, if it goes out of business, will adversely affect hundreds of thousands of persons Bailing out the company is better than letting it fail We lose more by letting the company fail than by saving it Some companies are simply too big to be allowed to fail Their failure is like an earthquake, adversely affecting all the people To save the innocent, you sometimes have to save the not-so-innocent Economist B Who is “we” when you say, “We lose more by letting the company fail than by saving it?” Some persons gain by having the company bailed out, and others lose Furthermore, if we continue to tell companies that the federal government will be there if they fail, we simply create ●● Economist A The aggregate supply curve is vertical Therefore, government actions designed to change aggregate demand in the economy will not lead to changes in Real GDP Changes in Real GDP come from the supply side of the economy, not the demand side Government has fewer tools (demand-side fiscal policy and monetary policy won’t work) capable of raising Real GDP than the upward-sloping AS economist believes Economist B The aggregate supply curve is upward sloping (in the short run) Government actions designed to change aggregate demand in the economy will lead to changes in Real GDP (at least in the short run) Changes in Real GDP (in the short run) can come from either the demand side or the supply side of the economy Government has more tools (demandside fiscal policy and monetary policy work) capable of raising Real GDP than the vertical-AS economist believes Key Terms and Concepts Elasticity of Investment Government Spending Multiplier Tax Multiplier Video Questions and Problems For video tutorials and answers, visit www.cengagebrain.com and search Arnold What is the relationship between the shape of the aggregate supply curve and the effectiveness of monetary policy at changing Real GDP? What does crowding out have to with the effectiveness of fiscal policy at changing Real GDP? Outline the details of the debate between economists who say the economy is self-regulating and those who say it is not What does the size of the government spending multiplier relative to the size of the tax multiplier have to with the effectiveness of fiscal policy at changing Real GDP? Not all economists are agreed as to whether government should bail out companies in financial problems Explain Questions and Problems Can tax revenue rise and the budget deficit decline as a result of an income tax rate cut? Explain your answer How an economist thinks the economy works—is it selfregulating or not?—influences his opinion of the role government should play in trying to stabilize the economy Do you agree or disagree? Explain your answer Whether an economist argues in favor of a rise in government spending or a cut in taxes (as an expansionary fiscal policy measure) could have something to with whether she views the government spending multiplier as greater or less than the tax multiplier Do you agree or disagree? Explain your answer Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com C hapter Debates in Macroeconomics over the Role and Effects of Government Whether an economist argues in favor of a rise in government spending or a cut in taxes (as an expansionary fiscal policy measure) could have something to with how he views the current size and scope of government in relationship to his optimal size and scope of government Do you agree or disagree? Explain your answer Whether an economist argues in favor of a rise in government spending (as an expansionary fiscal policy measure) could have something to with the degree of crowding out he expects as a result of the measure Do you agree or disagree? Explain your answer Some economists argue that if the economy currently needs to be stimulated to remove it from a recessionary gap, how government spends more money (on X or Y) matters less than the fact that it spends more money Do all economists agree? If not, what they say in response? Outline the details of the debate between economists who favor a rules-based monetary policy and those who favor a discretionary monetary policy 439 Something is referred to as a “double-edged sword” if it can have both favorable and unfavorable consequences In what way might government bailouts of failing companies or financial institutions be a double-edged sword? Explain your answer The shape of the aggregate supply curve matters to one’s view of the ability of government to change Real GDP by way of demand-side fiscal policy and monetary policy Do you agree or disagree? Explain your answer 10 What the values of the government spending and tax multipliers have to with getting the biggest bang for the buck? 11 There is little doubt that if income tax rates are cut, the size of the budget deficit will increase Do you agree or disagree? Explain your answer Working with Numbers and Graphs A $40 reduction in taxes increases Real GDP by $100, and a $50 increase in government spending increases Real GDP by $120 What is the tax multiplier? What is the government spending multiplier? A rise in aggregate demand raises Real GDP and the price level Draw the aggregate supply curve that is consistent with these results Next, a rise in aggregate demand raises the price level but leaves Real GDP unchanged Draw the aggregate supply curve that is consistent with these results If the tax base is $100 billion and tax revenues are $15 billion, what is the average tax rate? What would the aggregate supply curve look like if a rise in aggregate demand led to a rise in Real GDP, but to no change in the price level? Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it Find more at www.downloadslide.com Copyright 2013 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s) Editorial review has deemed that any suppressed content does not materially affect the overall learning experience Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it ... Application 10 : Do You Pay for Good Weather? 11 9 Application 11 : College Superathletes 12 0 Application 12 : 10 a.m Classes in College 12 2 Application 13 : Salsa, Chips, and Beer 12 3 Chapter Summary 12 5... Control Number: 2 012 952308 Student Edition ISBN 13 : 978 -1- 133 -18 975-6 Student Edition ISBN 10 : 1- 133 -18 975-X South-Western Cengage Learning 519 1 Natorp Boulevard Mason, OH 45040 USA Cengage Learning... An Introduction to Economics Microeconomics Part 1 Economics: The Science of Scarcity Part Microeconomic Fundamentals Chapter What Economics Is About Chapter 20 Elasticity 4 41 Appendix A Working